Will support price meet wheat production target?

THE Economic Committee of the Cabinet decided in October to increase the support price of wheat by Rs15 per 40kg to Rs415 against the previous year’s Rs400. Presumably, this has been done to help increase production and incomes of farmers.

The announcement gave reasonable time to farmers to decide on sowing of wheat vis-à-vis other crops competing with it for land and water.

The Ministry of Food, Agriculture and Livestock (Minfal) has set a target of 22 million tons for wheat crop 2005-06, against the official estimates of last year’s 21.56 million tons, an increase of 2.4 per cent. It has been envisaged that the area under wheat cultivation would rise to 8.42 million hectares, a marginal increase of about six hundred thousand hectares from 8.36 million hectares and a similar nominal increase in yield of 35kg per hectares from 2,579kg to 2,614kg per hectare.

The core issue is whether this increase of Rs15 per 40kg would provide adequate incentive to meet the output target in view of the rising costs of almost all the inputs since last year, that are needed for raising wheat production.

According to an study by the Agricultural Prices Commission (APCom) related to the support price policy of wheat crop 2005-06, the average cost of production of wheat, including land rent, has been estimated at Rs425 per 40kg in the Punjab and Rs406 in Sindh. The Commission had recommended Rs425 per 40kg as the support price. This hardly covers the cost of production in the Punjab but it does give a small margin of profit of about five per cent over that of Sindh. However, the ministry over-ruling the recommendations of APCom, suggested Rs415 per 40kg as the support price to which the ECC agreed.

Normally, the APCom report suggesting a support price for wheat is submitted in July-August. The cost of production, therefore, is supposed to be based on the prices of inputs prevailing prior to the finalization of the report. As wheat crop is sown from end- October going up to end of December and sometime beyond depending when the previous crops, cotton, sugarcane or rice are harvested. The input prices since then are likely to go up because of their rising price trend; so is the cost of production. Some data regarding the costs of some important items of inputs as prevalent a couple of weeks ago and compared to those of last year have been obtained from the farmers of a village in Faisalabad district.

As fertilizer is one of the important items, contributing to the production cost, it was reported that urea, which is used much more than other fertilizers, was selling at Rs510 per bag of 50kg against Rs450 during the last year.

Similarly, the price of DAP whose price was around Rs1,000 per 50kg bag last year, is selling at about Rs1,125 this year. The cost of diesel-run tube-well water has gone up from Rs150-160 per hour during the last year to Rs250 this year.

The cost of seed has gone up from Rs500 to Rs625 per 40kg. The labour, which used to charge three maunds (of 40kg each maund i.e., Rs1,200) would now be charging four maunds (Rs1,660) for harvesting one acre of the crop.

Similarly the cost of threshing is likely to go up. The production cost therefore could, or would, be higher than what APCom had worked out.

Let us now review if the production targets can be achieved. This depends on the area sown and the yield per hectare.

If the support price is below the production cost, how could it act as an incentive for raising wheat production. Some farmers view it as a disincentive. Thus the fear is that the farmers might not plant as much area as done last year.

Now, can the targeted yield per acre can be achieved? Here, the position on various inputs needs to be reviewed. First, the planting of the crop has been delayed for a couple of reasons. Late harvesting cotton, rice or sugarcane crops has impacted on the timely sowing of wheat. In some areas; there was closure of canals on an average for about a month. This delayed the pre-sowing irrigation, thus delays in planting wheat as it takes long for the land to come into proper “wattar” because of cold weather.

According to some reports only 52 per cent of the targeted area has been brought under the crop by the end of November. The delayed sowings is likely to adversely affect the yield. The supply position of certified seed has also not been very encouraging. Against the requirements of about 758 thousand tons, only 194 thousand tons was available.

The availability of canal water is reported to be less than last year. Unless timely and adequate rains compensate for the deficiency of water, productivity would be affected. Furthermore, the increase in fertilizer prices might limit their use. Not only this, there is likely to be an imbalance between nitrogen and phosphorous application because of the price hike, particularly in the case of phosphorus fertilizer. All these factors are likely to reduce the yield per hectare.

If, despite the above not-so-favourable factors, the target of 22 million tons of production is fulfilled, it would mean that the farmers had spent more than the support price. The difference between the average cost of production of Rs425 per 40kg and the support price of Rs415 is Rs10 or Rs250 per ton. A production of 22 million tons would mean that the cultivators would suffer a loss of Rs5.5 billion, whether the produce is sold in the market or consumed where produced. This situation would lower farmers’ income and increase poverty.

In order to reduce poverty, it would have been prudent if the support price had covered at least the cost of production plus some margin of profit. Some economists, who are not farmer-friendly, can argue that any increase in price would force the consumer’s price to go up which is not politically desirable and also would lead to higher inflation. Both these arguments are unjustified.

The lack of incentives leads to lower production and costlier imports, which results in higher price being paid by the consumers. It is important that the prices of inputs should be brought down, so that the production cost of the commodity is lowered in which case the government would not need to raise the support price every year.

There is every justification that the inputs could be subsidized. One of the major inputs is fertilizers. Their price can be adjusted in a way that proper balance is maintained in their use to obtain optimum use. The diesel and electricity prices also need to be looked into with a view to reduce their cost of harvesting, threshing, tube-well water etc and to lower the cost of production of agricultural commodities. These policy changes would promote higher production to the interest of the growers, the consumers and the government.